Impact of the coronavirus pandemic on international trade

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Summary of results from multi-country simulation models

The COVID-19 pandemic is the most serious global health crisis since the Spanish Influenza, and is set to become one of the most devastating health calamities to affect the economy in recent history. This article aims to provide a summary of the impact of COVID-19 across the World’s economies, and the mechanisms through which the pandemic has affected them, i.e. through supply and demand changes.

The current pandemic differs fundamentally from past episodes in two notable respects, both linked to the progress of globalisation: 1) we have witnessed much faster disease transmission than in past episodes, prompting large-scale containment policies, put in place globally in an almost synchronised way, and 2) the abrupt disruption of value chains leading to a sudden global stop in economic activity.

The COVID-19 pandemic impacts differently the societies and the economies of countries, including in Africa, depending on the number of international passenger arrivals, openness to, and dependence upon international trade and investment, and not least on the timing and rigorousness of government imposed preventive measures. The team of International Economics has extensively analysed and explored the impacts of COVID-19 on transport and logistics, as well as tourism in Mauritius, as well as other countries.

This article aims to provide a wide summary of the impact of COVID-19 across the World’s economies, and the mechanisms through which the pandemic has affected them, i.e. through supply and demand changes.

The impact of COVID-19 across the World

Various methodologies have been used to determine the impact of the coronavirus on the world’s economies. UNCTAD (2020), for example, indicates that the European Union (EU), with an impact of USD 15.6 billion on trade flows, the United States, with USD 5.8 billion, and Japan, with USD 5.2 billion, are some of the most impacted economies. This analysis, with a limited gauge only on short-term and direct effects of COVID-19 on trade, assumes that supply disruptions are limited to China and the supply capacity of the rest of the world remains constant. In this model, the economic sectors and countries that are most exposed to a disruption in China’s exports of intermediate inputs are analysed to measure the percentage of a given country’s exports in each industry that is vulnerable to supply disruption in China.

Similarly, Maliszewska, Mattoo and van der Mensbrugghe (2020), have found that in the global pandemic scenario, if the world’s GDP falls by 2% below the baseline, developing countries would see their GDP fall by 2.5%, and industrial countries by 1.8%. In the amplified pandemic scenario, the declines would be double in comparison. Under the amplified global pandemic scenario, global GDP decline would reach 3.9%, with the regions most integrated through trade and/or where tourism trade plays a big role in the economy facing the biggest GDP losses. Countries of Sub-Saharan Africa (SSA) together with those of the Middle East and North Africa (MENA), would be the least affected under both scenarios, with an estimated GDP loss of around 3%.

The authors have achieved these results by identifying four sets of shocks to trade which they assume occur simultaneously:

(1)    A supply shock consisting of a drop in employment,

(2)    A raise in the cost of international trade imports,

(3)    A sharp drop in international tourism and travel-related services, and

(4)    A demand switch by households who purchase fewer services requiring close human interaction, such as mass transport, domestic tourism, restaurants, and recreational activities, while redirecting demand towards consumption of goods and other services.

They consider two scenarios: a global pandemic and an amplified global pandemic. In the case of the global pandemic, it is assumed that countries bear only one-half of the impact of the full China shock. In the case of the amplified global pandemic, the shocks are uniform across all countries.

How does the Pandemic affect countries’ supply and demand capacity?

On the supply side, health issues are reflected in reduced activity in all local economic sectors, including tradable sectors such as manufacturing. Specifically, mortality and morbidity are traditional causes of the loss of productive workforce whenever academia tries to determine the impact of a health issue. Analysing the impacts of the Spanish flu, Correia, Luck, and Verner (2020) identified depressed labor supply through self-isolation measures, restrictions on mobility, illness, and increased mortality as the key issues impacting countries’ supply capacity. Similarly, the study by McKibbin and Fernando (2020) on the impact of the COVID-19 pandemic, identifies a fall in total labour supply, a rise in the risk-premium, and an increase in the costs of production in all sectors as the key supply-side impacts.

Probably the most striking impact of the current pandemic is the massive disruptions to international trade and global value chains (GVCs). According to Baldwin and Freeman (2020), the shocks to GVCs result for the most “globalised” economies in their manufacturing sectors facing “triple hits”:

1.       Direct supply disruptions hindering production since the disease is focused on the world’s manufacturing heartland (East Asia), and spreading fast in the other industrial countries.

2.       Supply-chain contagion amplifying the direct supply shocks as manufacturing sectors in less-affected nations find it harder and/or more expensive to acquire the necessary imported industrial inputs from the hard-hit nations, and subsequently from each other.

3.       Demand disruptions due to: i) macroeconomic drops in aggregate demand (i.e. recessions); ii) wait-and-see purchase-delays by consumers; and iii) investment-delays by firms.

On the demand side, the most immediate trade impact of the novel coronavirus pandemic has been the sudden surge of the global demand for COVID-19 related medical supplies, which exceeded current domestic production levels thus resulting in increased import demand and simultaneously rising prices. Export restrictions introduced by major economies facing shortages further led to price increases that, according to the World Bank, could be, for example, 20.5% in the case of medical masks.

More importantly, pandemics persistently depress aggregate demand. Correia, Luck, and Verner (2020) note that, on the demand side, the pandemic acts through various transmission channels such as reduced household spending, and the increased business uncertainty about future demand which depresses business investment.

Maliszewska, Mattoo and van der Mensbrugghe (2020) point to the fact that lower availability of labour results in lower demand for capital, as firms need a combination of labour and capital to produce goods and services.

Analysing the long-run effects of fifteen large pandemics from the Black Death (1347-1352) through the H1N1 Pandemic (2009), Jordà, Singh and Taylor (2020), found that such major events could exert transitory downward shocks to the natural rate of interest over the medium-term (around 10-20 years). Investment demand is likely to wane, as labour scarcity in the economy suppresses the need for high investment. They also found that “savers may react to the shock with increased saving, either behaviorally as new precautionary motives kick in, or simply to replace lost wealth used up during the peak of the calamity.”

McKibbin and Fernando (2020) point not only to a fall in aggregate consumption demand, but more importantly to distorted usual consumption patterns and resulting market anomalies due to panic among consumers and firms as preferences for certain activities change with the outbreak.  On the demand side, McKibbin and Fernando (2020) also take account of the shocks from increased health expenditures to contain the spread.

Conclusion

This paper has presented the main methodological approaches used by trade-related international organisations, in assessing the impacts of the COVID-19 outbreak on the global economy and trade. As shown, the most forward-looking methods are based on computable general equilibrium approaches, incorporating different impact scenarios. Whilst the assumed lengths and shocks retained for the scenarios vary, the worst impacts appear to hit national economies during the year 2020 with GDP falling within the range of 2%-3.9%, and world exports decreasing by upwards of 2.5%. In the worst-case scenario, i.e. the epidemic transforming into a pandemic, which we now witness, exports would decrease by 4.6%, although less integrated regions such as SSA would be the least affected.

Two concluding observations need to be made:

1. First, the reviewed methodologies were prepared at a time (February to April 2020) when the epidemic was largely confined to China, and the probability of a global pandemic beyond 2020 was only a remote possibility. As COVID-19 is still spreading fast across the globe and a second wave is expected in the last quarter of the year, we believe all the results for 2021 underestimate the potential impacts on the global economy and trade.

2. Second, the offsetting impacts of the policy interventions taken by national governments have not been included in the analyses presented, although such measures can reduce the coronavirus’ impacts by 30%-40%, according to the Asian Development Bank (ADB).

Author: Andras Lakatos

[1] Frederic Boissay and Phurichai Rungcharoenkitkul: Macroeconomic effects of COVID-19: an early review, Bank for International Settlements Bulletin, 17 April 2020

[2] Baker, P. (2020). The Impact of COVID-19: Reflections on the Transport and Logistics Sector. International Economics’ Insights.

[3] Tandrayen-Ragoobur, V., Seetanah, B. & de Melo, J. (2020). Monitoring COVID-19 in Tourist Islands. International Economics’ Insights. 

[4] IEC (2020). COVID-19 and African businesses: Focus on Mauritius. International Economics’ Insights.

[5] UNCTAD (2020): Global trade impact of the Coronavirus (COVID-19) Epidemic, document UNCTAD/DITC/INF/2020/1, 4 March 2020

[6] Sergio Correia, Stephan Luck, and Emil Verner: Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu, draft of April 10, 2020

[7] Warwick McKibbin and Roshen Fernando (2020): The global macroeconomic impacts of COVID-19: Seven scenarios, COVID Economics, Issue 10, 27 April 2020, CEPR Press

[8] Richard Baldwin and Rebecca Freeman: Supply chain contagion waves: Thinking ahead on manufacturing ‘contagion and reinfection’ from the COVID concussion, 1 April 2020, found at https://voxeu.org/article/covid-concussion-and-supply-chain-contagion-waves

[9] Alvaro Espitia, Nadia Rocha, Michele Ruta: Trade in Critical COVID-19 Products, World Bank Trade and COVID-19 Guidance Note, 27 March 2020

[10] Boissay et. al. mentioned above

[11] Idem.

[12] Maryla Maliszewska, Aaditya Mattoo and Dominique van der Mensbrugghe (2020): The Potential Impact of COVID-19 on GDP and Trade: A Preliminary Assessment, World Bank Policy Research Working Paper n° 9211

[13] Òscar Jordà, Sanjay R. Singh and Alan M. Taylor: Longer-run economic consequences of pandemics, Covid Economics, Issue 1, 3 April 2020

[14] Idem

[15] Warwick McKibbin and Roshen Fernando (2020)

[16] Idem.

[17] ADB Report (May 2020) – COVID-19 Economic Impact Could Reach $8.8 Trillion Globally — New ADB Report. Available from: https://www.adb.org/news/covid-19-economic-impact-could-reach-8-8-trillion-globally-new-adb-report

Methodologies Explained

Maliszewska, M., Mattoo, A. & van der Mensbrugghe, D. (2020): The Potential Impact of COVID-19 on GDP and Trade: A Preliminary Assessment, World Bank Policy Research Working Paper n° 9211

Methodology: 

The authors use the global computable general equilibrium (CGE) model ENVISAGE, which is a relatively standard CGE model. The model largely relies on the GTAP 9 database, including social accounting matrices and bilateral trade flows for 141 countries/regions and 57 sectors. For their analysis, the authors configured that model for a short-term closure scenario with the following assumptions:

(1) production elasticities are near zero, so there is little substitution possibility across inputs in production;

(2) in order to capture the typically durable relationship within global value chains, trade elasticities for goods reduced to reflect the short-run inability to replace imported components and final goods with products from other countries; and

(3) labour supply is exogenous, while wages adjust to equate demand and supply of labour.

The return to capital is fixed, while supply of capital is endogenous.

Results:

The authors found that, in the global pandemic scenario, the world’s GDP falls by 2% below the baseline, developing countries would see their GDP fall by 2.5%, and industrial countries by 1.8%. In the amplified pandemic scenario, the declines would double, compared with the global pandemic scenario. Under the amplified global pandemic scenario, global GDP decline would reach 3.9%, with the regions most integrated through trade and/or where tourism trade plays a big role in the economy facing the biggest GDP losses. Countries of Sub-Saharan Africa (SSA) together with those of the Middle East and North Africa (MENA) would be the least affected under both scenarios, with an estimated GDP loss of around 3%.

Regarding trade, in the global pandemic scenario world exports are expected to decrease by 2.5%, with some East Asian, South-East Asian and Pacific region countries being the most affected. In the amplified global pandemic scenario, world exports would see a decline of 4.6%.

WTO (2020): Simulating Some Potential Economic Effects of the COVID-19 Pandemic: Scenario analysis based on quantitative trade modelling

Methodology:

The WTO (2020) built three scenarios, depending on the time it takes for an effective medical treatment to be developed: an optimistic (six months) “V-shaped” scenario, a less optimistic “U-shaped” scenario, and a pessimistic recovery (one or more years) “L-shaped” scenario. This model assumes that the economy is affected along three different channels: (i) reduced labour supply; (ii) reduced demand and supply in specific sectors; (iii) rising trade costs because of border controls and restrictions to personal travel.

The WTO (2020) used the “WTO Global Trade Model” which is a recursive dynamic CGE model. This model contains a detailed sectoral breakdown, which sheds light on the impact of the sector-specific shocks to the economy, caused by the social distancing measures. With the WTO model it is also possible to study the impact of higher obstacles to international trade because of travel restrictions and rising costs of air cargo. Finally, the model contains intermediate linkages enabling the study of upstream and downstream effects of the sectoral shocks. The WTO CGE analysis used an aggregation of the GTAP Database, based on 16 regions and 21 sectors. In addition, a fiscal policy response was included in the model, to reflect the cost of large fiscal packages introduced by most countries to mitigate the coronavirus crisis negative effects.

Results:

The WTO (2020) three-scenario simulation shows that global reduction in GDP ranges from -4.8% in the V-shaped, 9.2% in the U-shaped recovery, to -11.1% in the L-shaped recovery scenario in 2020. For 2021, the results are, respectively, +4.2%, +8.1% and 2.8%.

At the regional level, patterns show that ASEAN, Mexico and the Newly Industrialised Countries are projected to see the biggest drops in GDP (respectively -12.2, -12.8 and -12.6% in the U-shaped scenario), while SSA’s macro-economic resilience appears stronger than the global average: -4.1% in the V-shaped, 7.4% in the U-shaped recovery, and -9.3% in the L-shaped recovery scenario in 2020. However, for 2021, SSA’s projected GDP growth is weaker than the global macroeconomy’s in all three scenarios: 3.4, 6.2 and 2.3%.

Regarding trade, the simulations indicate that the reduction in global exports is considerably larger than the reduction in GDP in all three scenarios.

McKibbin, W. & Fernando, R. (2020). The global macroeconomic impacts of COVID-19: Seven scenarios, COVID Economics, Issue 10, 27 April 2020, CEPR Press

Methodology:

The authors apply a global intertemporal general equilibrium model with heterogeneous agents, called the G-Cubed Multi-Country Model. This model is a hybrid of Dynamic Stochastic General Equilibrium (DSGE) Models and CGE Models. The G-Cubed (G20) model has 6 sectors and 24 countries and regions.

The seven scenarios built by the authors are based on the survey of historical pandemics and the most recent data on the COVID-19 virus, and vary by attack rate, mortality rate and the countries experiencing the epidemiological shocks. Scenarios 1-3 assume the epidemiological events are confined to China, so these have lost interest by now. Scenarios 4-6 are the pandemic scenarios where the epidemiological shocks occur in all countries to differing degrees but are always temporary. Scenario 7 is a case where a mild pandemic is expected to be recurring each year for the indefinite future.

The channels through which the shocks are transmitted to the economy taken into consideration in McKibbin and Fernando (2020) include

(i) shocks to labour supply;

(ii) shocks to the equity risk premium of economic sectors;

(iii) shocks to the cost of production in each sector;

(iv) shocks to consumption demand; and

(v) shocks to government expenditure.

Results:

McKibbin and Fernando’s 7-scenarios simulation results are presented for 20 countries and 4 regions. The results indicate that under scenario 6, the most severely hit country, Japan, would suffer a 9.9% loss of GDP in 2021, followed by Germany (-8.7%), Rest of Eurozone and the United States (each -8.4%), Italy (-8.3%), and Brazil, France and Russia (each by -8.0%). The least affected country would be Saudi Arabia, with a GDP reduction of -2.4%, which reflects its least integrated economy status among the analysed group of countries.

Calderon, Cesar; Kambou, Gerard; Zebaze Djiofack, Calvin; Korman, Vijdan; Kubota, Megumi; Cantu Canales, Catalina. 2020. “Africa’s Pulse, No. 21” (April), World Bank, Washington, DC

Methodology:

To evaluate the impact of COVID-19 in Sub-Saharan Africa, the World Bank has used CGE simulations with the above-mentioned ENVISAGE model. The analysis relies on 14 African countries/regions based on (1) the availability of data in the GTAP database (only 32 African countries are represented there), (2) the size of the economy (the priority is to assess the largest African economies represented in the GTAP database), (3) key transmission channels (oil, mining, other commodities, global supply chains, tourism and travel), and (4) currently affected countries.

In this model three scenarios have been considered:

1.       Global spread and severe cases in Africa.

2.       Global spread and a catastrophic outbreak in Africa.

3.       Global spread and non-cooperative African response.

Results:

Simulations from the World Bank’s CGE model suggest that even under the most optimistic scenario of a rapid and efficient response, the immediate impact of COVID-19 on growth in SSA would be substantial: GDP would be lower than in the no-COVID base case by about 5.7 percentage points in 2020. Growth in the region is projected to decline to -2.5% in 2020. Under the most pessimistic scenario, GDP would be 7.6% lower than in the no-COVID base case. In this event, growth in the region would decline to -5.1 percent in 2020.

[1] This includes three components: mortality due to infection, morbidity due to infection and morbidity arising from caregiving for affected family members (absenteeism from work due to caregiving family members who are infected).

[2] Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Other Asia, Other oil producing countries, Republic of Korea, Rest of Euro Zone, Rest of OECD, Rest of the World, Russia, Saudi Arabia, South Africa, Turkey, United Kingdom, United States of America.

[3] The non-African groups considered include China, the EU 27, the United States, other OECD countries, and the rest of the world.

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